In Japan, does Abe mean Asset Bubble Economics?

Strategists at Bank of America Merrill Lynch on Thursday posed a set of (rhetorical) questions suggesting that the party in global asset markets might get a whole lot wilder before Japan reaches the end of its economic and monetary stimulus under the regime of Prime Minister Shinzo Abe:

– Shouldn’t Abe stand for Asset Bubble Economics?

– Is Abe the anti-Thatcher?

– If the markets don’t correct in Q2, could we “melt up?”

– If the central banks are “all-in,” why aren’t you?

– Who is John Galt?

Reuters

OK, strike that last one. But the strength of the quantitative easing the Bank of Japan unveiled last week will likely resonate outside Japan as well as within the country, the Merrill analysts said.

For example, just a 5% shift in those assets toward foreign bonds would amount to $300 billion, and such a shift is likely to result in about $100 billion in addition demand for U.S. fixed income, Merrill said. A boom in emerging-market debt securities could also be “similarly exacerbated,” they said.

There are risks as well, including the possibility for poor policy communication from the BOJ, a premature tightening of monetary policy, or a failure by the government to follow through on fiscal reforms alongside the monetary stimulus. “But right now, we continue to see plenty of upside for Japanese equities,” Merrill said.

They added that unless the markets see a correction in the second quarter, there is also the risk of a “melt-up” in global stocks and other risk assets under current conditions that include excessive liquidity and benign inflation.

“This would cause laggards such as BRIC resources, commodities and Europe to catch a [second-quarter] bid,” they said. BRIC resources were its “preferred hedge” against the risk of a melt-up, Merrill added.

Merrill made the case for investors to participate in the party as central banks go “all-in” with their accommodative monetary policies, saying the QE policies are no longer causing commodity prices to rise.

“This reduces the likelihood of inflation ending the liquidity party in 2013, making commodity markets an underrated accomplice to the current coexistence of record high equity and bond prices,” they said.

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